The Guardian (and World Bank) distorts cause of Palestinian economic woes

A guest post by Akus

Harriet Sherwood has been remarkably quiet of late, but rushed into service on October 8 with a story headlined ‘Israel’s West Bank control ‘costing Palestinian economy billions, which was followed by the sub-header “World Bank says allowing Palestinians to use the 61% of the West Bank under full Israeli control would boost the economy”.


Her article is based on a 72 page World Bank study released a day earlier, West Bank and Gaza – Area C and the future of the Palestinian economy.  Sherwood cites Mariam Sherman, World Bank Country Director for the West Bank and Gaza, asserting the following:

“Unleashing the potential from that ‘restricted land’ … and allowing Palestinians to put these resources to work, would provide whole new areas of economic activity and set the economy on the path to sustainable growth”

Powerful language, but as I read through the article, and then much of the World Bank report, several strange aspects of the belief that Palestinian control of Area C would make such a dramatic difference became apparent.

1. Why does Israel control “Area C”?

The World Bank report and Sherwood’s article make it appear that Israel unreasonably maintains control of Area C. Sherwood repeats the false claim that Israeli settlements are illegal: “All Israeli settlements, which are illegal under international law, are situated in Area C.”

In fact, Israel is behaving in accordance with the Interim Agreement it made in 1995 with the Palestinian Authority ceding interim control of Area C to Israel and not restricting ‘settlement’ activity. So it is important to understand how Area C came into being and why Israel remains in control of it, something that Sherwood ignores or doesn’t understand.

Area C was created as a result of the 1995 Interim Agreement, as the report itself makes clear in its description of the agreement in Par. 8 of Page 3, and in part was intended to pass to Palestinian control:

The division of the West Bank into Areas A, B and C dates back to the 1995 Interim Agreement between the Palestinian Liberation Organization and the Government of Israel. Area A includes most major pre-existing Palestinian urban areas, covers 18 percent of the West Bank and is under full Palestinian security and civil control. Area B consists largely of peri-urban areas and small towns, comprises 21 percent of the West Bank and is under Palestinian civil control and Israeli security control.

Area C was defined under the Interim Agreement as “areas of the West Bank outside Areas A and B, which, except for the issues that will be negotiated in the permanent status negotiations, will be gradually transferred to Palestinian jurisdiction in accordance with this Agreement.

So the Palestinians agreed that Area C would remain under Israeli control, at least until final negotiations settle the borders between Israel and a future Palestinian state.

It needs reminding that since the Palestinians have frequently walked away from negotiations following the 1995 Agreement, Israel is justified in maintaining its control of Area C. Yasser Arafat agreed to this in exchange for control of the heavily populated areas of the West Bank (full control of Area A, civil control of Area B).

Thus the underlying premise of World Bank report, faithfully repeated by Sherwood, that “Israel’s control of a huge swath of the West Bank is costing the Palestinian economy $3.4bn (£2.1bn) a year”, represents a mischaracterization. The Palestinian West Bank economy, until final agreement is reached, can only be considered to include Areas A and B.

The Palestinian Authority’s previous refusal to negotiate the future of the West Bank’s borders, among other matters, means that they have not negotiated the transfer of much of Area C to their own control as was expected when the agreement was signed.

2. How many West Bank Arabs live in Area C?

Per Sherwood, the report says about 180,000 Arab West Bankers live there. Actually, it is a bit more complicated than that, and oddly enough that figure comes from a largely EU-funded Israeli NGO called Bimkom (which specializes in providing planning assistance to Arab communities in Area C) rather than from a Palestinian source. Bimkom’s estimate is provided in footnote 66 on Page 18 of the report:

The Palestinian population located in Area C is estimated by the Israeli planning organization Bimkom to be 180,000 (this includes those whose house is located in Area C but are part of communities which are split between Area C and Areas A or/and B); PCBS data shows that around 113,000 people live in communities entirely located in Area C.

The 180,000 strong Arab population of Area C is considered to be about 6.6% of the West Bank Arab population.  Put another way, approximately 93.4% of all West Bank Arabs live in areas A and B whose economy is controlled by the Palestinian Authority.

3. So how prosperous can Area C be if the Palestinians controlled it?

As I considered that 93.4% number and the $3.4 billion I began to wonder about the methodology and conclusions of the World Bank report. The methodological approaches are laid out in great detail at the end, but deeper thought suggests that the report may be overly optimistic in assessing the degree to which control of Area C would really change matters economically for the West Bankers   (the report mostly ignores Gaza).  To make matters worse, the report’s Executive Summary claims that the calculation of $3.4 billion, which already includes a “1.5 overall multiplier effect” on “other related sectors”, is “very probably an underestimate”.

Now, $3.4 billion (or even more, if the hint in the Executive Summary is believed) is indeed a considerable sum.  But, before I thought more deeply about it and realized how carefully the issue has been framed by the World Bank report, I dismissed it as rather a marginal issue. (I am reminded of Daniel Kahneman’s 2011 book “Thinking, Fast and Slow” shows how framing issues can change perceptions).

“Thinking fast”, I recalled that Israel has a GDP of about  80 times that $3.4 billion number and as small as the Palestinian economy might be by comparison, surely the gain of $3 billion or so would not be the panacea that the World Bank thinks. Are they that much on a knife-edge between prosperity and disaster?

Well, no. “Thinking slow”, I realized that if $3.4bn (£2.1bn) a year represents 35% of Palestinian GDP, the GDP of Areas A and B (and possibly Gaza) must be only about $10 billion at most. In fact, Figure 1 of the report shows that indeed the current Palestinian GDP is $10 billion. 

Ten billion dollars (US) is a remarkably low number for a population of 2.5 million people (excluding Gaza), even for 4 million people if the $10 billion number includes Gaza.  It is about $2,500 per capita (the PCBS predicts $1,687 per capita and by comparison Israel’s GDP is about $13,800 per capita) and a terrible indictment of the economic performance of the PA (and Hamas). It also demonstrates how billions in aid that have been poured into “Palestine” has been wasted. 

The World Bank report expects us to accept that even though the entire population of Areas A and B (93.6% of the West Bank Arabs), and possibly including that of Gaza (another 1.5 million people), generates a GDP of $10 billion, controlling and developing other largely empty areas of the West Bank will increase that by about 35%. Is this possible?

It is true that the report comprehensively assesses a variety of different activities that could add value – agriculture (provided there is almost unlimited water), tourism at the Dead Sea and Gaza Beach, adding cell phone towers to improve coverage and increase cell phone use, quarrying stone, etc. Oddly, the benchmarks that they frequently refer to as a basis for their estimates are Israeli activity and success in each of these sectors. It must surely be possible to create wealth in several of these sectors already in Areas A and B (and Gaza). Yet, the report would have you believe that 94% of the Arab population in the West Bank can only generate GDP of $10 billion or less because Israel controls Area C.

It strains credulity. If it is at least reasonable to assume that there is some correlation between the number of people living in an area and the level of economic activity in that area, it seems highly unlikely that simply adding land to the equation could have such a dramatic effect. One can blame Israel’s control of the disputed territory up to a point, but the idea that wealth will flow from the largely barren hills of the West Bank and the beaches of Gaza when Israel leaves Area C is, frankly, quite incredible. Consider the claim in light of previous economic performances in the territories, and when billions in wasted and stolen aid has poured in for decades that have created such a bloated civil service.

Finally, the report seems to work on the assumption that change will be rapid. It has taken Israel 65 years to reach its current prosperity in many of the sectors that the World Bank thinks could be copied to Area C so, clearly, change in Palestine will be slow. The 35% addition to GDP the report predicts could actually take decades to achieve. Thus, the blaring headlines in the Guardian article should surely be toned down.

The emphasis on Area C is yet another diversion from the core Palestinian problems – excessive reliance on foreign aid that distorts their tiny economy, masks massive corruption and promotes a culture of incitement and scapegoating inconsistent with the values necessary for social and economic progress.

Nothing in the report demonstrates better the degree to which the Palestinians are themselves responsible for their situation than a paragraph which lists prospects for a tourist industry based on religious and historical sites (mostly Jewish), Dead Sea tourism, and the beaches of Gaza: (Emphasis added)

42. Tourism currently makes a meager contribution to the Palestinian economy. It contributes less than 3 percent to Palestinian GDP and some 2 percent of total employment. Following a sharp decline during the second intifada years, the Palestinian tourism industry has recovered and capacity has been expanded: the past 3 years have seen an average of more than 500,000 arrivals, with total stays of more than 1.2 million room nights per year, up from well below 50,000 arrivals in 2000-2002.

In summary, to go back to Mariam Sherman’s statement:

But, unleashing the potential from that ‘restricted land,’ –access to which is currently constrained by layers of restrictions – and allowing Palestinians to put these resources to work, would provide whole new areas of economic activity and set the economy on the path to sustainable growth.

Will it be so?

Maybe. But it will take decades if it can be done at all, and I suspect the estimates of the contribution Area C could provide are grossly overstated based on prior performance. The dismal record goes back into Ottoman times, through the Jordanian occupation, and 40 plus years that included, until the terror activities became more than Israel could bear, close integration with a far wealthier neighbor.

The issue is not the lack of Area C – it is what goes on in Areas A and B, and Gaza. Change that, and you will achieve more than the arid hills of Area C could ever provide.

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